The stock market has continued to pull back for the past two weeks after a strong bounce from the November lows. The past two weeks have been very difficult to trade with little follow through to either side. Overall, the pattern of a consolidation from the October highs remains intact, although most of the indexes are vulnerable to further selling as it stands.

This pattern is quite evident when looking at the S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF. Overall, it's easy to see how SPY has been drifting back since October, although the past four weeks have seen some violent moves. Most of the selling has occurred in the vicinity of the 200-day moving average, which currently stands near $126. SPY basically pulled back the past two weeks to fill an open gap in the $122 area, but is holding below the 50-day moving average in the process. SPY is in a pivotal area here, as further downside would likely imply a test or breakdown through the November lows. However, a bounce from these levels may signify a higher low and a likely breakout above the current pattern. (For more, see Moving Averages: Introduction.)

The DJ Industrial Average, as represented by the Diamonds Trust, Series 1 (NYSE:DIA) ETF, is following a similar pattern. There are a few differences, such as DIA holding above its open gap and 50-day moving average, but much of it can be attributed to the fact that the index only follows 30 stocks and may be influenced by a couple of standout stocks like McDonald's Corporation (NYSE:MCD). DIA is currently sitting right on its 20, 50 and 200-day moving averages, which could be a positive, except DIA has been under constant pressure for the past two weeks. DIA could come back to fill the open gap near $116, although any lower and DIA could threaten to become unraveled.

The Nasdaq 100, as represented the Powershares QQQ ETF (Nasdaq:QQQ) ETF, continued to perform poorly and closed underneath all its key moving averages. QQQ is quite vulnerable where it stands, with the November lows right in its sights. Apple, Inc. (Nasdaq:AAPL) has been acting poorly, which is certainly weighing the index down. QQQ is oversold, which may work in the bulls favor, but as it stands, this average looks like it may be headed lower.

The small caps as represented by the iShares Russell 2000 Index (NYSE:IWM) ETF closed right on its 20 and 50-day moving averages. It held fared a little better than SPY and QQQ by closing well off the prior gap and near its key averages. This is one group that could take a leadership role into the new year, so its relative strength should be payed attention too regardless of how minor in magnitude. It's possible that IWM will drift back towards $70, but its critical that IWM hold up in this area and form a higher lows. Any sustained weakness under this weeks lows would imply a trip back down under the November lows.

The Bottom Line
The bottom line is that the markets remain quite vulnerable despite the fact they could be close to setting higher lows above the November pivot lows. One factor that may work in the markets favor is that the indexes are starting to get oversold after two weeks of selling. We have been expecting strength towards the end of the year, but the markets have not been making it easy. The indexes remain vulnerable in their current positions and much will be decided in the next week. If the markets dip under their November lows, it could lead to much lower prices. However, any bounce from these levels could catch short sellers off guard and lead to a break above the current consolidation. (For more, see Technical Analysis: Introduction.)

Charts courtesy of

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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